Keep INVESTING Simple and Safe (KISS)
****Investment Philosophy, Strategy and various Valuation Methods****
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.

WARREN BUFFETT INTERVIEW: THE BEST LIFE ADVICE I’VE EVER RECEIVED

Billionaire Warren Buffett, widely considered the smartest investor on the planet and known for his modest lifestyle despite astronomical wealth, was recently asked the best advice he ever received. Surprisingly, it wasn’t about money, finances or wealth creation. It was about parenting. Here’s what Buffett said about the best advice he’s ever received:

The power of unconditional love. I mean, there is no power on earth like unconditional love. And I think that if you offered that to your child, I mean you’re 90 percent of the way home. There may be days when you don’t feel like it, it’s not uncritical love, that’s a different animal, but to know you can always come back, that is huge in life. That takes you a long, long way. And I would say that every parent out there that can extend that to their child at an early age, it’s going to make for a better human being. – Warren Buffett

Speculative-growth stocks can inspire dreams of wealth - and nightmares of poverty.

These companies are often new ventures selling something people want, generating rapid revenue growth, but incurring high expenses as they strive to become a permanent fixture of the corporate landscape.

One might be the next Microsoft MSFT. Or the next Atari.

Their defining characteristics are rapid revenue growth but slower or spotty earnings growth - strong sales, in other words, but a lagging bottom line.

In fact, many speculative growth companies lose money - lots of it. That's not much inducement to invest.

Still, corporate America's future heavyweights and best investments may lurk in this high-risk, high-reward corner of the market.

It's possible to curb some of the risk, too.

For example, Yahoo YHOO, the World Wide Web portal was one of the hottest Internet stocks of the 1990s.

The Chinese stock market? I don’t know what markets are going to do. When I was over in China they were bombarding me with questions about the market and of course you have these A shares, including Petro China, which was going public in China. Petro China and others were trading at twice the price within China (at that time Chinese people were not permitted to buy shares in Hong Kong or in the United States) than outside China. This was really extraordinary. If you knew these restrictions were going to break down it would have been great to short the stocks in China and buy them elsewhere around the world.

But the Chinese stock market has 1.2 billion people waking up to the stock markets and having an investing or gambling urge. The stock market was becoming wildly popular as we know in China. Petro China at one time, based on the Chinese prices, was the most valuable company in the world, and was selling for over 1 trillion dollars, whereas Exxon was only worth 500 billion. This made Petro China twice as valuable as the largest company in the world.

I have no idea why and where that many people were relatively new to the market and were very excited about stocks. You do know in the end you have to buy things on a basis of when you get a value for what you pay. This seemed to lose relevance in a market like China. They had a situation like that in Kuwait 20 years ago. When a whole society, and a rich society, (certainly far richer than 15 years ago), a huge market opened up for them. I have no idea whether the people get friendlier or crazier. That is not my game.

My game is simply to buy something worth a dollar for 50 cents. Then if they go crazy in the right direction it helps me and if they go crazy in the other direction I just buy more.

My job is to take advantage of craziness. And that goes back to Ben Graham’s Intelligent Investor chapter 8. If you are going to invest based on value with a partner (lets say Mr. Market) - let’s say you each own half of a McDonalds stand. Every day he quotes a price at which he either wants to buy me out or sell me his interest. If he hears a bad rumour he low-balls it, so I buy. Other days he is all excited about some Burger King burning down and seeing some line ups and decides to give a high offer, so I sell.

If I’m going to have a partner like that what kind of partner do I want? I want a psycho. The stupider he gets the better I am going to do. I don’t want some cool, calm rational partner. I want somebody with huge ups and downs - a manic depressive. Basically that’s what you get in the stock market some times. As long as you realize he is there to serve you, and not to instruct you, you can make a lot of money. You can’t listen to Mr. Market and think he must be right.Only listen to what he says in the context of: when this guy gets way out of line I am going to whack him. And basically that’s what you get in the stock market.

In China you can’t tell how far the markets will go to extremes. You can’t tell that, I have no idea where the markets are going to go tomorrow or the next day or the next month or the next year. I do know that in the end stocks tend to sell for what they are worth. At least in the range of what they are worth. They go all over the place in between - but tend to true value in the end.

A Discussion of Mr. Warren Buffett with Dr. George Athanassakos and
Ivey MBA and HBA students
Omaha, NB, March 31, 2008, 10:00 am - 12:00 pm

Buffett is often thought of as a pure value investor, buying companies and shares only when they are dirt cheap. He does some of that, and his investments in Goldman and GE last year were an example.

But far and awayBuffett's investing style is to buy great companies at reasonable prices.His simple definition of a great company is one which has a sustainable competitive advantage, like a railway, for example.

Price wise, he is not getting Burlington on the cheap. The Financial Times calls Burlinton's valuation "generous", but also says "Buffett is not a man to quibble (on price) when he sees something he likes".

Buffett imitators often try to buy shares in a company because they are cheap. Buffett himself concentrates on buying great businesses. The difference is chalk and cheese, and it's the reason why there's only one Warren Buffett.

One of the hardest things to grasp in investing is that when the present turns the darkest, the future becomes the brightest.Warren Buffett once captured this with a famous and oft-repeated quote: "I will tell you how to become rich: Be fearful when others are greedy, and greedy when others are fearful."

There's another, more specific Buffett rule that gets less attention. In 2001, Buffett wrote an article for Fortune magazine laying out a few investing truisms. In short, you want to buy stocks when the total market capitalization of all public companies looks cheap in relation to that country's gross national product (similar to gross domestic product, or GDP). He called this technique "probably the best single measure of where valuations stand at any given moment."

He even threw around some numbers. "If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you."

Tallying up the total market value of all listed stocks isn't easy. Different analysts come up with different numbers. The most widely used method is the full capitalization version of the Wilshire 5000 index, which tracks the market cap of all U.S. companies "with readily available price data." Divide that index by gross national product, and you get Buffett's ratio.

Where are we today? After the market bloodbath of the past few weeks, the ratio of U.S. stocks to GNP recently hit 79% -- just below what I'd call Buffett's comfort zone.

Source: Dow Jones, St. Louis Fed, author's calculations.

Understand what this does not mean:

It does not mean stocks are bound to go up in the short run. No metric can predict that.

It does not mean stocks won't fall further from here. A ratio becoming mildly attractive doesn't rule out the possibility of it becoming much more attractive. In fact, that's usually how it works. The history of bear markets is that of stocks becoming not just a little cheap, but obnoxiously cheap.

And importantly, other valuation metrics, such as the cyclically adjusted P/E ratio created by Yale professor Robert Shiller, still peg stocks as slightly overvalued.

But Buffett's metric means things start getting interesting. Forty years of data show there's a fairly strong correlation between Buffett's ratio and stock returns two years hence. At 79%, today's ratio is in a range that has historically set investors up for decent future returns:

There are no certainties. There are no promises. But investing gets interesting when the odds of success are in your favour. Buffett's ratio suggests those odds are now pretty good. If you were excited about stocks a month ago, you should be thrilled about them today. Indeed, many of us are.

"The lower things go, the more I buy," Buffett said last week. How about you?

Based on these fundamental differences, assign it to one of eight groups. These stock types are:

Speculative Growth

Aggressive Growth

Classic Growth

Slow Growth

High Yield

Cyclicals

Hard Assets

Distressed.

These stock types address the question: What kind of company is this?

Here is a quick overview of these very different companies.

Speculative Growth: Yahoo YHOO. The premier Internet portal has become one of the giants of the online world in 1999, with an audience in the tens of millions. It has become consistently profitable, unlike most of its online brethren, but its track record is still so short that it is definitely risky.

Aggressive Growth: Starbucks SBUX. The coffee chain has grown like gangbusters while also showing a healthy profit, the two most important characteristics of an aggressive growth stock.

Classic Growth: McDonalds MCD. the fast-food giant is a stereotypical classic growth stock: A well-known name with an established track record. It's growing steadily, but not as fast as speculative growth or aggressive growth companies.

Slow Growth: Procter & Gamble PG. The consumer-products giant is a good example of this type; its growth is slower than that of even classic-growth companies, but it makes up for this lack of growth with high profitability.

High Yield: Philip Morris MO. The food and tobacco giant's stock was hammered in 1999, but the company still gives back much of its enormous cash flow to shareholders in the form of a hefty dividend.

Cyclicals: United Technologies UTX. This industrial conglomerate is a great example of a cyclical stock. Its business - aerospace equipment, air conditioners, and elevators - are highly sensitive to the performance of the general economy.

Hard Assets: Barrick Gold ABX. This company is one of the most consistently profitable gold-mining stocks, but it also illustrates many of the charcteristics unique to companies that sell hard assets such as minerals or oil.

Distressed: Silicon Graphics SGI. This maker of computer workstations and server systems was once a hot technology stock, but it has suffered through a lot of problems since the mid-1990s and has seen its stock price tank.

If they're successful, though, they enter a rapid growth period, where sales - and eventually profits - shoot upward.

Then, alas, comes the point when the company has exhausted all of the easy growth opportunities. The low-hanging fruit has been picked. The company enters a mature phase in which sales maybe growing, but at a much slower rate than before.

Finally, in a company's dotage, it's all management can do to grow the company at all. The company's either instagnation or outright decline.

Using stock types, help you pinpoint where a company is in the life cycle.

Let's look at semiconductors.
What is the key difference between chipmakers Intel INTC and National Semiconductor NSM?
Or between Broadcom BRCM and Rambus RMBS?

One of the babies of the industry is Rambus, a company that makes devices to speed up computer processing. The company's sales have grown rapidly, though inconsistently. Earnings have been spottier. Rambus has actually lost money over the past 5 years in aggregate. It is a great example of a speculative - growth company.

Moving up the maturity scale a notch, we find Broadcom, a company about 10 times the size of tiny Rambus. The company specializes in chips that enable broadband data communication. Broadcom's sales have grown rapidly, and although it has had one money-losing year over the past five years ending in 1999, it's generally increased its earnings in line with sales. That's the sign of an aggressive-growth company: one that has managed to increase both sales and profits at a rapid clip.

Now we come to companies like industry leader Intel. Not too long ago, Intel landed in the aggressive-growth group along with firms like Broadcom, but because of slowing growth, Intel has mellowed into a classic-growth company. Despite the snags of late, Intel has a record of good sales growth and consistently positive earnings. That's the mark of a classic-growth firm. Don't expect them to grow sales by double digits every year, but do expect them to generate solid profits - and maybe even pay out a good dividend.

Even more mature than Intel is Texas Instruments TXN. The company was busy restructuring itself in the late 1990s and has been shrinking as a result. The company's trailing three-year sales growth at the end of 1999 was negative, and earnings have bounced all over the place. Texas Instruments merits a slow-growth tag because of its rather unspectacular record.

The trials at Texas Instruments, however, are nothing like those at chipmaker National Semiconductor. The company's sales and cash flows have fallen, and the firm has lost money as a result. The situation is bad enough to land National Semiconductor in the distressed stock type - the nether-zone in which we place firms with a history of serious operating problems. These are typically companies that have run into growth problems, either because the market is saturated or because competitors have the upper hand.

Ongoing activities to invest for the future
Continue to learn and explore.
Continue to master the understanding of all types of businesses
Continue to master valuation of business
Continue to master the understanding of market behaviour and Mr. Market
Continue to master behavioural finance to understand herd and individual behaviour.
Continue to learn, develop, refine and explore investing knowledge, concepts and applications.
Continue to research companies and businesses.
Continue to seek opportunities in good and bad markets.

MR. MARKET

“Common stocks have one important investment characteristic and one important speculative characteristic.

Their investment value and average market price tend to increase irregularly but persistently over the decades, as their net worth builds up through the reinvestment of undistributed earnings.

However,most of the timecommon stocks are subject to irrational and excessive price fluctuations in both directions, as the consequence of the ingrained tendency of most people to speculate or gamble”.

Wednesday, 28 December 2011

Value Investing - "An approach to investing best summed up by Benjamin Graham, a veteran American investor, who urged others to seek a 'margin of safety'; the opposite of growth investing. Value investors ferret out the stocks of companies (that is value stocks) which have solid businesses and balance sheets but which, for one reason or another, are out of favour with the market. Such investors aim to buy low and sell high. Their techniques vary. Warren Buffett, one of the most successful investors of all time, values companies on the basis of the present value of their future cash flows. Others look for companies whose price/earnings ratios are below the average for the market as a whole. Most take a long-term view of investment."

The figurative earnings can indicate a bargain

Stocks

Dollars & Sense

Bankers are sticklers for the details. It's their business to invest money in loans to individuals and businesses, and they expect to be repaid, on time and in full -- no excuses.

As stockholders, we should think like bankers. When we buy shares in a company, we're making an investment, and we should be paid back, too. The payback for shareholders is figurative, of course, but consider how much a company would have to earn before its cumulative earnings equal its current stock price. That period is called the PEG payback period, and it's based on the PEG ratio: a firm's price/earnings ratio divided by its expected growth rate. The PEG payback period is the time it would take a company to pay back its investors with earnings.

Take Schlumberger, the oil- and gas-services company. It has a PEG payback period of 15.3 years, so at the company's expected growth rate, Schlumberger would have to add up its earnings per share for 15.3 years straight before those earnings would equal its current stock price. (Morningstar includes each stock's PEG payback period in the "stock valuation" portion of its Quicktake report.)

The PEG payback period is good for gauging whether a company's expected earnings justify its current stock price. A high PEG payback period generally means shareholders are paying for a company with relatively low earnings. Stocks with low PEG payback periodsaren't risk-free, but they're cheaper based on expected future earnings.

For this week's analyst picks, we stayed with companies that have PEG payback periods of less than 11 years.One company worth noting is Alltel, the nation's fifth-largest wireless telephone carrier. The Little Rock, Ark.-based company has a PEG payback period of 10.6 years -- a figure that has increased recently with Alltel's stock price.

Alltel's appeal comes from its growing wireless network. The company recently inked a deal to buy wireless assets from Bell Atlantic and GTE, two companies that have been forced by regulators to divest some assets in conjunction with their merger this spring.

The deal will give Alltel customers inexpensive access to Bell Atlantic and GTE's wireless networks so Alltel phones may "roam," or operate on the other companies' infrastructures, at a low cost. Alltel's sales growth has been outpacing the telecommunications-industry average. The company has also posted strong profitability ratios, which earns it B-plus grades from Morningstar for profitability.

Another PEG-payback qualifier is Tyco, the conglomerate that fell out of favor last year due to questions about past accounting practices. Those still-unproven accusations tarnished Tyco's reputation, but with a PEG payback period of 8.1 years and an otherwise solid track record, this company may be worth a look.

The most useful thing about payback periods is that they give a good (albeit rough) idea of how risky an investment is.

We may feel fairly confident in our assessment of a company's earnings potential over the next year or so, but that confidence usually diminishes as we peer farther into the future.

Thus, the longer the payback period, the greater risk we run that we won't get the return we expect.

That is especially true if the company we're looking at is a young firm without an established market position or is dependent on a rapidly changing technology.

Take Qualcomm QCOM, for example. This digital-wireless-communications powerhouse was the hottest stock on Wall Street in 1999 after appreciating 12-fold in 11 months. Its PEG payback is 12.4 years--not too bad considering its $350-plus stock price. But compare that with Allstate ALL, which watched its stock drop about 30% in 1999. Its PEG payback is 6.6 years.

Qualcomm may be the sexier company and certainly has had upside for its investors, but sometimes the cheaper stock looks like a better deal.

After all, stocks with longer payback periods aren't just riskier, they also have lower rewards.

Remember that the payback period is the amount of time it takes to double your money.

If a stock has a payback period of five years, that means it doubles the amount of the original investment in five years. An investment that doubles in five years has an average rate of return of 15% per annum (on a scientific calculator, take the fifth root of 2, subtract 1, and multiply by 100).

A payback period of 10 years implies a rate of return of a little more than 7%. At 20 years, the rate is less than 4%. And so on.

A payback period is the amount of time it takes for a company to accumulate enough in earnings to equal the amount of your original investment.

That sounds complicated, but in simple terms, it is the time it would take you to double your money based on the profits a company is generating.

There are a couple of payback periods to consider, and one of the simplest can be determined by looking at the stock's P/E, or the ratio of its price to its earnings per share.

P/E is one way you can estimate how many years it would take for the company to accumulate earnings equal to its share price.

Imagine a $10 stock with $1 per share in earnings.

Based on its P/E of 10 ($10/$1), if the company continues to earn $1 per share every year, it would take 10 years for all those dollars to add up to the original $10 stock price.

So a stock with a P/E of 10 has a payback period of 10 years, assuming its earnings are the same each year.

But most companies don't make the same earnings year after year. As an investor, you're hoping the earnings will grow.

To account for growth, there is something called the PEG payback period, which is based on the price/earnings growth (or PEG) ratio.

The PEG ratio relates a company's price/earnings ratio (P/E) to its earnings growth.

It is calculated by dividing a stock's forward P/E, or its P/E based on consensus analyst earnings estimates (what Wall Street analysts expect the company to earn over the next 12 months), by its forecasted earnings-growth rate (the rate at which analysts expect the company to grow).

PEG ratio = forward P/E / expected growth rate

Like P/E, the PEG ratio tells you how many years it will take for earnings to equal the stock price. But unlike P/E, it assumes earnings will grow at a certain rate.

Take our $10 stock with $1 per share in earnings.

If analysts' consensus estimates say the company will grow at a rate of 10%, we would increase each year's earnings by 10% before adding it up.

Therefore, the first year's earnings would be $1.10 (that's $1 times 1.1), the second year's would be $1.21 ($1.10 times 1.1), and so on.

Based on a 10% growth rate, it would take seven years before earnings added up to the original stock price.

As you can see, the PEG payback period for any growing company will be shorter than the P/E payback period.

If you own a home or a car, you are probably all too familiar with what happens when you take out a loan.

A bank lends you a certain amount of money that you must pay back at a specified rate, such as one payment per month for five to 30 years.

In exchange for taking a risk that you won't repay the loan, the bank earns some revenue on top of its investment, based on the interest rate it charges.

As a shareholder in a company, you're a lot like a bank.

When you buy stock, you're in essence lending a company your money so it can buy what it needs for its business and (hopefully) grow.

You get paid back as the company's earnings grow and its stock appreciates.

But whereas a bank clearly establishes its profit margin and a timetable for being repaid, shareholders aren't that lucky. (It's a different story for bondholders, who literally loan the company money and do get scheduled interest payments.)

It is possible, however, to estimate what you may earn on your investment and when you'll earn it by examining a stock's payback period.

The present value of that future-income stream is the theoretically correct value of the stock.

This method has its own difficulties and is less frequently used, but absolute value deserves a place in every investor's arsenal of valuation tools.

Calculating the absolute value of a stock isn't easy. It is tough to forecast:

how fast a company's free cash flow will grow,

how long they'll grow, and

at what rate they should be discounted back to the present.

We estimate stocks's absolute values by inputting our estimates of a company's growth rate, profitability, and the efficiency with which it uses its assets into a discounted cash flow model. The result is an analyst-driven estimate of a stock's fair value in absolute terms.

In an imperfect world, opting for the much easier - if less pure - method of relative valuation often makes sense.

However, when the companies you are using as your benchmark are themselves mis-priced,relative valuation can lead you astray; without a reliable measurement tool, your measurements will be off. That last point is crucial.

If the S&P 500, for example, is trading at a P/E ratio that is very high by historical standards, using it as a benchmark can be hazardous.

A stock can appear much cheaper than the overall market and still be quite expensive in absolute terms. So what's an investor to do?

Unfortunately, there aren't any easy answers.

The best way to approach stock valuation is by using many different methods, the same way you would if you were valuing a used car or a house.

Checking out what similar houses in a neighbourhood have sold for is akin to relative valuation, and walking through a house you're interested in - looking at the construction and quality of materials - is similar to intrinsic valuation.

The most frequently used method is relative valuation, which compares a stock's valuation with those of other stocks or with the company's own historical valuations.

For example, if you were considering the relative valuation for a chemical company CC, you would compare its stock's price/earnings ratio (or its price/sales ratio, etc.) with that of other chemicals makers or with that of the overall stock market.

If CC has a P/E ratio of 16 and the average for the industry is closer to, say 25, CC's shares are cheap on a relative basis.

You can also compare CC's P/E with the average P/E of an index, such as the S&P 500, to see whether CC still looked cheap.

The problem with relative valuations is that not all companies are made alike - not even all chemicals makers.

There could be very good reasons why CC has a lower P/E than its average peer.

Maybe the company doesn't have the growth prospects of other chemicals companies.

Maybe the possible liability from a product litigation rightly puts a damper on the stock's price.

After all, a Hyundai has a lower sticker price than a Mercedes, but for very good reasons.

The key is to research your stocks well and be aware of the factors that might justifiably make them cheaper or more expensive than similar stocks.

The value of most stocks is a combination of the current value of the company and the value of the profits it will make in the future.

In general, the more growth the market expects from a company, the more the company's market value will owe to expected future profits.

Take online bookseller YY, for example. By most measures, company YY has little or no current value; it has only minuscule book value and is gushing red ink. Liquidating company YY would leave its investors with zilch. But the market thinks the company's future profit potential is so bright that it has pinned a multibillion-dollar worth (the company's market capitalization) on the stock.

Another way to think of a stock's value is that a company's stock price consists of a combination of what you are paying for the company's current level of profitability and what you're paying for its earnings growth.

Since company YY is far from profitable then, the stock price is based almost entirely on expectations of future growth. That is one reason company YY's stock is so volatile.

As those expectations rise and fall, so does the price of its stock.

In comparison, the stock price of another stock XX largely reflects the company's current value, not its future growth. Company XX is quite profitable, but no one expects it to grow terribly fast.

There are lots of great cars out there, but the sticker price may be more than the actual worth of the car. Some manufacturers command a premium price because their cars have a certain cachet, not because their cars are necessarily more reliable or of better quality than others on the market.

It is the same thing with stocks.

Some stocks are valued much more richly than others because they are hot or popular with investors, not because the companies are more profitable or have better growth prospects,

The ability to decide whether a company's stock price accurately reflects its performance is the heart of stock valuation.

But does it matter if a company's high ROE comes from high debt and not operating efficiency?

If a company has a steady or steadily growing business, it might not matter that much.

For example, companies in the consumer-staples sector, where demand is stable, can handle fairly large debt loads with little problem. And the judicious use of debt by such companies can be a boon to shareholders, boosting profitability without unduly increasing risk.

If a company's business is cyclical or volatile in some other way, though, watch out.

The problem is thatdebt comes with fixed costs in the form of interest payments. The company has to make those interest payments every year, whether business is good or bad.

When a company increases debt, it increases its fixed costs as a percentage of total costs.

In years when business is good, a company with high fixed costs as a percentage of total costs can make for a great profitability because once those costs are covered, any additional sales the company makes fall straight to the bottom line.

When business is bad, however, the fixed costs of debt push earnings even lower.

That is why debt is sometimes referred to as leverage: It levers earnings, making strong earnings stronger and weak earnings weaker.

When companies in cyclical or volatile businesses have a lot of leverage, their earnings therefore become even more volatile.

So the next time you're thinking about profitability, make the distinction between the kind that is internally generated (through operational efficiencies) and the kind that is inflated by debt (through leverage).

You can make a lot of money of stocks of companies structured like the latter, but your return is more assured with stocks of companies like the former.

Value of an Asset

From The Essays of Warren Buffett: “In Theory of Investment Value, written over 50 years ago, John Burr Williams set forth the equation for value, which we condense here: The value of any stock, bond or business today is determined by the cash inflows and outflows—discounted at an appropriate interest rate—that can be expected to occur during the lifetime of the asset.”

Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.

Always buy a lot when the price is low.

Never buy when the stock is overpriced.

It is alright to buy when the selected stock is at a fair price.

Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the price is still obviously too high.

Do not time the market for such or any stocks.

By keeping to the above strategy, the returns will be delivered through the growth of the company's business.

So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.

The downside risk is protected through only buying when the price is low or fairly priced.

Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.

Sell urgently when the company business fundamental has deteriorated irreversibly.

You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 16, you can do so leisurely.

In conclusion, a critical key to successful investing is in your stock picking ability.

My Philosophy and Strategy

DOCUMENTRY- WARREN BUFFETT THE WORLDS GREATEST MONEY MAKER

Peter Lynch

11 Lessons From Peter Lynch

Peter Lynch taught me:

1. Behind every stock is a company. Find out what it’s doing.2. Never invest in any idea you can’t illustrate with a crayon.3. Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.4. Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.5. Time is on your side when you own shares of superior companies.6. Owning stock is like having children. Don’t get involved with more than you can handle.7. When the insiders are buying, it’s a good sign.8. Unless you’re a short seller, it never pays to be pessimistic.9. A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.10. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.11. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

Think of your physical, mental and social well-being. Money may not buy happiness.

What is Risk?

The major RISK facing you is the possibility of not reaching your long-term investment goal through the growth of your funds in real terms. And the greatest enemy of reaching those goals is INFLATION. Nothing is safe from inflation. Short-term price volatility is NOT risk for investors who have time horizons 5, 10, 15 or 30 years away. Volatility is the friend of the long term investor. The most important friends of your investment goal are COMPOUNDING and TIME.

Life Cycle of A Successful Company

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:- fixed assets such as equipment, property, or industrial buildings- fixing problems with an asset- preparing an asset to be used in business- restoring property- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A great company with a Durable Competitive Advantage will have a ratio of less than 25%.

The best stock investment strategy

Keep it simple. Keep it safe (make money with less risk taking). You don't need to pick the best stock or even the best stock funds to do well, if you have an investment strategy that keeps you out of trouble.

Benjamin Graham's 113 Wise Words

The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

Philip Fisher's Wise Words

"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

Visualization Video for a New Life

All equity security investments present a risk of loss of capital

Investment performance is not guaranteed and future returns may differ from past returns. As investment conditions change over time, past returns should not be used to predict future returns. The results of your investing will be affected by a number of factors, including the performance of the investment markets in which you invest.

The Ultimate Hold-versus-Sell Test

Here is the overriding primary test, followed by observations on why it is so critically important:

Knowing all that you now know and expect about the company and its stock (not what you originally believed or hoped at time of purchase), and assuming that you had available capital, and assuming that it would not cause a portfolio imbalance to do so, would you buy this stock today, at today's price?

No equivocation. Yes or no?

Answers such as maybe or probably are not acceptable since they are ways of dodging the issue. No investor probably buys a stock; they either place an order or do not.

Here is the implication of your answer to that critical test: if you did not answer with a clear affirmative, you should sell; only if you said a strong yes, are you justified to hold.

Some thoughts on Analysing Stocks (KISS)

Ideally a stock you plan to purchase should have all of the following charateristics:

• A rising trend of earnings dividends and book value per share.• A balance sheet with less debt than other companies in its particular industry.• A P/E ratio no higher than average.• A dividend yield that suits your particular needs.• A below-average dividend pay-out ratio.• A history of earnings and dividends not pockmarked by erratic ups and downs.• Companies whose ROE is 15 or better.• A ratio of price to cash flow (P/CF) that is not too high when compared to other stocks in the same industry.

Benjamin Graham

"To achieve satisfactory investment results is easier than most people realise; to achieve superior results is harder than it looks."

Sell the losers, let the winners run.

Losers refer NOT to those stocks with the depressed prices but to those whose revenues and earnings aren't capable of growing adequately. Weed out these losers and reinvest the cash into other stocks with better revenues and earnings potential for higher returns.

Margin of Safety Concept: Stocks should be bought like groceries, not like perfume

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments.If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?

Market Fluctuations of Investor's Portfolio

Note carefully what Graham is saying here. It is not just possible, but probable, that most of the stocks you own will gain at least 50% from their lowest price and lose at least 33%("equivalent one-third") from their highest price -regardless of which stocks you own or whether the market as a whole goes up or down.If you can't live with that - or you think your portfolio is somehow magically exempt from it - then you are not yet entitled to call yourself an investor.